Income Replacement Policies

Short Term/Long Term Disability Basics

Income replacement policies do exactly as their name suggests: they replace a person’s income when s/he is unable to work.

These policies are contractual in nature, as opposed to statutory.

The nature of the benefit and the scope of a person’s rights to enjoy the benefit are set by the terms of the policy.

Typically, a policy will provide for the payment of a specified percentage of the person’s income (perhaps 60-70%), upon the occurrence of a triggering event (such as the onset of disability) for a specified period of years (typically until 62, 65 or retirement age) provided that the individual remains disabled as defined by the policy.

Income replacement policies can be privately purchased (usually only prior to the onset of disability) or provided as an employment benefit.

Particularly in the latter case, they may be structured to provide a short-term benefit for an initial period of time (such as 100% income replacement for 6 months), followed by a different benefit for the duration of the coverage (such as 70% until retirement).

Hence the terms short term disability insurance (STD) and long term disability insurance (LTD).

The LTD Definition of “Disability”

A key question regarding income replacement policies is what constitutes a triggering event entitling the covered person to payment under the policy in question.

In other words, what is the definition of “disability” that triggers payment?

Because income replacement policies are contractual, the definition of “disability” can vary from contract to contract.

It is important to know what your contract says in order to know if and when you might be paid.

While the definition of “disability” is contract specific, one thing is likely: it will be a different definition than the one used in the employment portion of the ADA.

The essential claim for benefits under STD/LTD policies is that you cannot do your job or work at all (as opposed to an ADA request for job accommodation so you can stay on the job and want to do so).

The most generous income replacement policies will be tied to the standard of whether you can perform your job, or one like it, suitable for your training and experience.

In other words, you will get paid if you can’t do your job, even if you can still work.

An example might be a physician who develops Parkinson’s. If s/he has such a policy, then upon becoming unable to do his/her job, payment would be forthcoming – even if the physician could do other work, perhaps such as lecturing or doing manual labor.

Other policies might adopt a stricter standard: not whether you can do your job, but whether you can work, i.e., can you do any job? Obviously, this will make collecting on such policies more difficult. This standard is akin to the one used by Social Security.

It is critical to know if your policy retains the same standard for “disability” over time. In many cases, an income replacement policy may combine the two approaches, typically applying the easier to meet “can you do your job” standard for an initial period (e.g. 2 years) then switching to the more difficult to meet “can you work” standard. For PWPs, this can make for a difficult planning process, since being awarded LTD for the initial period is by no means a guarantee that LTD benefits will continue thereafter.

Keep in mind that the ADA’s notion of “the ameliorative effects of mitigating measures” does not carry over in the context of income replacement, unless of course it is part of the LTD contract. Thus, taking steps to get better (meds, surgery, etc.) could affect your entitlement to this benefit.